Pre-tax Prices Research Articles

Are Tax-Free Wine Prices Attractive for Consumers? Empirical Evidence from Norway

Wine is highly taxed in Norway, but there is a Norwegian island, Svalbard, with no taxes at all. For the purpose of comparing wine prices, with a focus on tax-free prices, we have collected a data set with identical wines from the two parts of Norway. At the retail level wines are only sold at state monopoly shops in mainland Norway and information from these allows a calculation of the before-tax prices in the country. The prices at the tax-free shop on Svalbard are significantly higher than the pre-tax prices and thus some monopoly price setting is taking place in the tax-free shop. Like in the present case duty-free shops often attract consumers with ‘tax-free’ prices, but some surplus is still extracted from the customers due to a monopoly behavior.

The effect of implicit and explicit taxes on the purchasing of ‘high-in-calorie’ products: A randomized controlled trial

Public health taxes on less healthy food and beverage products have been shown to be effective in various settings. However, it is unclear if observed reductions in the quantity of taxed products purchased is a result of price increases due to the tax or the accompanying messaging and if the effects are influenced by the level of support for such taxes within the population. 941 adults residing in Singapore were randomized and asked to shop in one of four versions of a fully functional on-line experimental grocery store: 1) no tax control; 2) implicit tax showing only post-tax prices (i.e., 20 % higher than control prices) on high-in-calorie products; 3) fake tax showing pre-tax prices and a label falsely indicating that the price includes a 20 % tax on high-in-calorie products; and 4) explicit tax showing the same label as in 3) and an actual 20 % price increase applied to the high-in-calorie products. The proportion of high-in-calorie products purchased was 14 % in the control arm. We were unable to reject the null hypothesis of no effect in the implicit tax arm compared to control (0.08, 95 % CI −3.31 to 1.77) or in the fake tax arm compared to the control (2.59, 95 % CI −5.04 to 0.00) but observed a statistically significant 3.35 percentage point decrease (95 % CI −6.01 to −0.5) in the explicit tax arm compared to control. We were unable to reject the null hypothesis of no effect in any of the outcomes related to diet quality. Individuals who support the tax showed greater responsiveness to the explicit and fake taxes compared to those who do not (price elasticities of demand of −1.38 and −0.51 respectively). Results suggest that reductions in the proportions of high-in-calorie products purchased may be largely attributable to explicit messaging rather than to price increases. However, even when effective, policymakers should recognize that changes in purchasing patterns may not improve diet quality and that results may not generalize to other areas where levels of support differ.

The effect of deed taxes on real estate prices in China

With rapidly accelerating real estate prices in China, the government has used changes in deed tax rates to affect demand. Tax rates have been increased for buyers of large or multiple homes to discourage speculative demand. We analyze the effects of deed tax rates on real estate prices over the period 2004–2013, estimating traditional dynamic models and dynamic spatial models. Results indicate that deed tax rate increases have a negative effect on pre-tax prices for both residential units and land use rights. Spatial spillover effects are also found in the residential market, with larger effects in the long term.

Sales Tax Holidays: Evidence on Incidence

Policymakers frequently employ tax holidays to stimulate spending and transfer state revenues to favored groups. Perhaps the most common form of this policy in the United States are “Back to School” tax holidays where states waive the retail sales tax on selected school supplies in the fall. Surprisingly, the empirical research of this policy has found that tax savings are overshifted to households. This paper argues that tax holiday dates should be assumed to be selected endogenously so as to minimize forgone revenue and maximize consumer incidence by targeting periods where prices are lowest. Causal evidence is considered in a natural experiment out of Tennessee, where legislation for a spring sales tax holiday in 2006 and 2007 for school supplies was reauthorized as part of a broader series of tax cuts. We conclude from the evidence of these Tennessee events suggest that households, on average, receive the full tax savings during these programs. However, consumer incidence is heterogeneous with some retailers recapturing the tax savings with higher pre-tax prices.

Motor fuel prices in Turkey

The world׳s most expensive motor fuel (gasoline, diesel and LPG) is sold most likely in the Republic of Turkey. This paper investigates the key issues related to the motor fuel prices in Turkey. First of all, the paper analyses the main reason behind high prices, namely motor fuel taxes in Turkey. Then, it estimates the elasticity of motor fuel demand in Turkey using an econometric analysis. The findings indicate that motor fuel demand in Turkey is quite inelastic and, therefore, not responsive to price increases caused by an increase in either pre-tax prices or taxes. Therefore, fuel market in Turkey is open to opportunistic behavior by firms (through excessive profits) and the government (through excessive taxes). Besides, the paper focuses on the impact of high motor fuel prices on road transport associated activities, including the pattern of passenger transportation, motorization rate, fuel use, total kilometers traveled and CO2 emissions from road transportation. The impact of motor fuel prices on income distribution in Turkey and Turkish public opinion about high motor fuel prices are also among the subjects investigated in the course of the study.

The Deep Cause of the Subprime Lending Crisis

The financial crisis induced calls to extend, strengthen and tighten financial regulations. This paper argues that the deep underlying problem is not in the financial industry, but in the real side of the economy, in real estate. The most important collateral for mortgage loans is land value, which then serves as collateral for packages of loans and leverage derivatives. The problem is that real estate has had periodic boom-bust cycles. The rise in land values becomes magnified as land speculators buy properties for resale at higher prices. Land then becomes priced not for current use but for expected future demand, which at the peak of the boom is overly optimistic. Speculators with the greatest expectations later suffer the winner’s curse. If taxation were shifted to tax almost all of the land value, the price of land would fall to a small fraction of the pre-tax price, eliminating gains from land speculation. Mortgage loans would be collateralized by the value of buildings and of income from tenants, rather than land value. The boom-bust real estate cycle would disappear.

Taxation and the asymmetric adjustment of selected retail energy prices in the UK

This paper investigates the adjustment of the prices of four key petroleum products in the UK following changes in the price of crude oil. We find significant evidence that the pre-tax prices of diesel, kerosene, and gas oil adjust more rapidly in an upward than a downward direction, but that the pre-tax price of unleaded petrol adjusts symmetrically. However, these patterns are obscured at the pump once one accounts for fuel duty and value-added tax, raising the possibility that firms can use the tax system to conceal rent-seeking behaviour.

Taxation and the Asymmetric Adjustment of Selected Retail Energy Prices in the UK

This paper investigates the adjustment of the prices of four key petroleum products in the UK following changes in the price of crude oil. We find significant evidence that the pre-tax prices of diesel, kerosene and gas oil adjust more rapidly in an upward than a downward direction but that the pre-tax price of unleaded petrol adjusts symmetrically. However, these patterns are obscured at the pump once one accounts for fuel duty and value added tax, raising the possibility that firms can use the tax system to conceal rent seeking behavior.

Biodiesel production from residual oils recovered from spent bleaching earth

This work was to study technical and economic feasibilities of converting residual oils recovered from spent bleaching earth generated at soybean oil refineries into useable biodiesel. Experimental results showed that fatty acids in the SBE residual oil were hexadecenoic acid (58.19%), stearic acid (21.49%) and oleic acid (20.32%), which were similar to those of vegetable oils. The methyl ester conversion via a transesterification process gave a yield between 85 and 90%. The biodiesel qualities were in reasonable agreement with both EN 14214 and ASTM D6751 standards. A preliminary financial analysis showed that the production cost of biodiesel from SBE oils was significantly lower than the pre-tax price of fossil diesel or those made of vegetable oils or waste cooking oils. The effects of the crude oil price and the investment on the production cost and the investment return period were also conducted. The result showed that the investment would return faster at higher crude oil price.

Methanol infrastructure — will it affect the introduction of SPFC vehicles?

The possibility that future solid polymer fuel cell vehicles will be fuelled by methanol has been suggested. If this is the case, it will have significant implications for the future structure of the methanol supply industry, and methanol supply and availability may have an impact on the take-up of these SPFC vehicles. In this study, a model assessing the possible future penetration of methanol SPFC vehicles was constructed. This suggested that it would be possible for SPFC vehicles to achieve rapid market penetration after an initially slow start. A further model indicated that methanol supply would be adequate for vehicle demand until about 2013, when significant new capacity would be required. The cost of this new capacity was estimated, along with the cost of providing refuelling infrastructure such as road tankers, storage, and suitable fuelling stations. Amortising the cost over a short period (to 2013) could double the pre-tax price of methanol as a fuel, while over a longer timeframe (to 2029) it would add less than 10% to this value. The model suggests that methanol capacity need not be a constraint to the future introduction of SPFC vehicles using it as a fuel, but that other factors such as fuel purity and safety must be carefully considered before real costs can be calculated.

99/02468 The political economy of motor-fuel taxation

This paper examines the political and economic underpinnings of gasoline tax policy. The theoretical model extends the earlier work of Hettich and Winer (1988) to flush out the effect of a change in the pre-tax price of a taxable activity on the politically optimal tax rate. Using a large cross-sectional sample of U.S. states over 1960-94, the empirical model tests the predictions of the theoretical model within the context of the state tax policy on gasoline. While simultaneously controlling for other politico-economic influences, we find that the influence of changes in gas prices on tax rates is negative. To our knowledge, this is the first study to include a fully developed theoretical model and its empirical application to the gasoline market for a test of the vote-maximizing model of tax policy.

The Political Economy of Motor-Fuel Taxation

This paper examines the political and economic underpinnings of gasoline tax policy. The theoretical model extends the earlier work of Hettich and Winer (1988) to flush out the effect of a change in the pre-tax price of a taxable activity on the politically optimal tax rate. Using a large cross-sectional sample of U.S. states over 1960-94, the empirical model tests the predictions of the theoretical model within the context of the state tax policy on gasoline. While simultaneously controlling for other politico-economic influences, we find that the influence of changes in gas prices on tax rates is negative. To our knowledge, this is the first study to include a fully developed theoretical model and its empirical application to the gasoline market for a test of the votemaximizing model of tax policy.

Price Leadership and Discrimination in the European Car Market

This paper explains differences in the price of the same good in different markets. In the authors' model, n producers each play the role of Stackelberg leader on their own market and there is one market with no domestic producer. The authors show that, even without demand differences between markets, pretax prices will be higher on markets where there are high-cost domestic producers and where taxes are low. Evidence from the European car market, based on time series for individual models, supports these results. Furthermore, as the model suggests, exchange rate changes are not passed through to car prices. Copyright 1990 by Blackwell Publishing Ltd.

Taxation of Income from Capital: A Theoretical Reappraisal

This article shows that the traditional mapping between tax bases and tax treatments for investment and borrowing transactions is deeply flawed. In a non-general-equilibrium setting where the effect of taxes on pre-tax prices is not included in the analysis, I show that the cash flow income tax and not the traditional income tax implements the Haig-Simons ideal. Furthermore, in the same setting the cash flow income tax is not equivalent to yield exemption.

Real Property Taxes, Local Public Services, and Residential Property Values

Recent empirical work on the effects of property taxes on residential property values has suggested that much of the tax is capitalized. Oates [6], in a cross-sectional analysis of fifty-three residential communities in north-eastern New Jersey, concluded that a substantial portion of the residential property tax is capitalized in the form of depressed property values. Orr [8], in studying thirty-one communities in the Boston area, reached a similar conclusion for the effects on property values of property tax differentials among communities. This evidence supports the hypothesis that property taxes are not shifted but are borne largely by property owners at the time the tax is levied. The theory of tax incidence suggests that taxes on land cannot be shifted. Under competitive conditions, shifting occurs only if the quantity of land supplied is decreased when the tax is imposed.' If the supply of land is perfectly inelastic as typically assumed, the property tax will be capitalized and the value of the land will decrease. If existing landowners attempt to maintain the pre-tax price of land (assuming the supply of land is perfectly inelastic), the result will be excess land supplied and consequent downward pressure on land prices until the tax is fully capitalized. Even if the tax on land is fully capitalized, however, an increase in property taxes will not necessarily *The authors thank Dale M. Hoover and an anonymous referee of this journal for some helpful suggestions. Paper No. 3753 of the Journal Series of the North Carolina State University Agricultural Experiment Station, N.C. 'For a discussion of the theory of incidence of the property tax, see Netzer [4]. decrease land values. The proceeds of the tax may be used for public services, which may serve to increase land values and offset the tax capitalization. Property taxes on land improvements such as residential housing may be shifted forward. The taxes will increase costs causing capital to flow to alternative uses until the return to capital in housing in the long run rises to that available on other investments. If the supply of capital to construction is responsive to the lower return, the tax will, in the long run, reduce the supply of housing, thereby bidding up its price. For owner-occupied housing structures, however, the annual increment to the supply is usually a small fraction of the total housing stock. In the case of residential housing, therefore, structures might be considered to be inelastically supplied in the short run. Hence, one might argue that it is less likely that shifting will occur in the short-run and consequently the tax will tend to be capitalized into lower property values. However, the actual short-run elasticity of supply of residential construction remains a parameter to be determined empirically. The incidence of the residential property tax in the long run depends on the long-run elasticity of supply of housing which is dependent on both the supply of land and the supply of structures.